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Monetary policy transmission in China: dual shocks with dual bond markets

Published online by Cambridge University Press:  09 January 2023

Makram El-Shagi  and
Lunan Jiang
Makram El-Shagi
Affiliation:
Center for Financial Development and Stability, School of Economics, Henan University, Henan, China. Halle Institute for Economic Research, Halle, Germany.
Lunan Jiang*
Affiliation:
Center for Financial Development and Stability, School of Economics, Henan University, Henan, China.
*
*Corresponding author. Email: lunan.jiang@vip.henu.edu.cn
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Abstract

Although China’s monetary and financial system differs drastically from its Western counterpart, empirical studies covering this vast economy have often been simple reestimations or recalibrations of models originally designed to describe US or European monetary policy. In this paper, we aim to assess Chinese monetary policy and, in particular, monetary policy transmission through yield curves into the real economy. Our study takes into account the peculiarities of the Chinese economy: Namely, our model includes both China’s modern attempts at a market-based monetary policy as well as the “authority-based” one that is a relic of the original banking system. Besides, it considers the special nature of the Chinese treasury bond market, which is separated into two independent ones with very limited direct arbitrage opportunities between almost identical assets. Finally, it incorporates the role of real estate, which played an essential role in China during the last decade. Our results show that different monetary policy shocks cause asymmetric effects on macroeconomic and financial variables.

Keywords

Monetary policyyield curvemarket segmentation
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 8 , December 2023 , pp. 2229 - 2251
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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Footnotes

†

We thank the editor and two anonymous referees for their helpful comments on this paper. This work was supported by the National Natural Science Foundation of China-Youth fund through Grant 71903049.

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